Employee or Independent Contractor? Get it Right or Pay

It’s been a tough month for big employers of independent contractors.

In the wake of last week’s FedEx settlement and in what could signal problems for many technology platforms, the California Labor Commission ruled this week that an Uber driver is an employee of the company, and not an independent contractor as the company claimed.

While this particular ruling only applies to a single driver and Uber has appealed, it raises the question of where to draw the line between independent contractor and employee, whether the line is moving, and what this means for workers and companies alike.

Contractor v. Employee

As we’ve previously discussed, there are wage and benefit ramifications surrounding the classification of workers. Independent contractors are responsible for their own business-related expenses, and are not guaranteed any minimum wage or benefit coverage. Rightly or wrongly, companies find this classification appealing because it can save them thousands, or even millions. On the flip side though, when a company decides to hire an independent contractor over an employee, they agree to give up the right to control the ways in which the work is completed and the worker acts.

When a company decides to hire an independent contractor over an employee, they agree to give up the right to control the ways in which the work is completed and the worker acts.

The Future of Peer to Peer Platforms

Unfortunately the law is not always able to keep up with technological and societal changes at the pace we might like. Often cases get to courtrooms because they involve situations that do not fit squarely into existing definitions of employee or contractor. The courts must then determine how to apply the law.

Currently, companies like Uber, Instacart, and Homejoy seem to want to have it both ways — they want workers to be responsible for many of their own expenses (i.e. gas, supplies, or benefits), but still want to control how they dress, act, when they work, and how that work is performed. In other words, they want to have their proverbial cake and eat it too.

For their parts, some workers also aren’t sure how they’d like to be classified. Many like the freedom to set their own hours and the flexibility to work with multiple companies, while others would prefer the security and benefits that come with full time employment.

Not surprisingly given the amount of disagreement between and across workers and platforms, courts around the nation have found similarly situated workers to be both contractors and employees, with no definitive answer as of yet.

The recent California rulings may indicate a shift, at least in that state, towards classifying peer to peer platforms as employers and providers of a service, not just a platform. This shift will have massive ramification for the dozens of companies that currently rely on armies of independent contractors. If this trend continues, companies like Uber will be forced to either take on a massive increase in labor costs, or change their approach regarding control over workers, possibly at the cost of brand integrity and voice.

This shift will have massive operating model and cost ramification for the dozens of companies that currently take advantage of the marketplace mindset.

What You Need to Know

While having it both ways might go unnoticed in the short term, if you work with independent contractors, all it takes is one misclassification lawsuit to cost legal fees, back pay, penalties, interest, reimbursements, and benefits, which could put serious strain on your company’s bottom line.

Understanding the requirements for classification as an independent contractor is important, both at the federal and state levels. As always, if you have any concerns about how you or your workers have been classified, consult an attorney to discuss your specific situation.